Eager investors look forward to the annual “Santa Claus Rally,” but this year, Congress and the President seem intent on delivering lumps of coal to investors. There is indeed something special about the Twelve Days of Christmas. The first day of Christmas starts--unsurprisingly--on December 25. The twelfth day is January 5. Going back to 1950, the average return on the S&P 500 over those twelve days is 1.79%. The average 12-day return on the S&P 500 outside the Twelve Days of Christmas is 0.37%.
Perhaps it’s the eggnog or holiday cheer that makes investors a bit more enthusiastic during the Twelve Days. Maybe what drives this pattern is that the Twelve Days straddle the New Year, when some investors do tax loss selling while others make New Year’s resolutions to invest more the next year. Or maybe it’s just a statistical quirk. Regardless of the cause, or if it’s just a coincidence, the fiscal cliff debate seems to be dragging down the markets this holiday season.
Congress and the President still have time between now and the end of the year to get a deal done. The prospect of the payroll tax cut expiring, unemployment insurance benefits being reduced, approximately 30 million more Americans being subject to the Alternative Minimum Tax, doctors’ reimbursements for treating Medicare patients being cut by 27%, and various other adverse shocks should be enough to push politicians to do something. Because of politicians’ strong re-election instincts, I think they’ll successfully patch over some of the fiscal cliff and come back in the new session of congress to deal with some of the other issues. If they don’t, they’ll just spend the next few years playing the “blame game” in the hopes of getting an electoral advantage in the 2014 mid-term election. It seems a lot like the pattern that played out at the end of 2010, when the 2001-2003 tax cuts were first set to expire. That time, though, they had a deal done after Thanksgiving. This time, it’s the same pattern, but played out over a different time-scale.
While politicians have been avoiding directly dealing with the fiscal cliff, they have also been avoiding other important pieces of legislation. For example, without congressional and presidential action, thanks to a law passed in 1949, the Department of Agriculture will be required to purchase milk at about $8 per gallon when we go into the new year. That will likely drive up the price of milk at grocery stores for every American. Yet, in early December, Congress found the time to pass legislation banning the use of the word “lunatic” in all federal legislation. Perhaps that's just a poetic reflection of the lunacy of politics.